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Troubles Loom for Emerging Market Currencies

  • Jim Randle

Iranian street money exchangers show currencies at Tehran's old main bazaar, Iran, Nov. 25, 2014.

Iranian street money exchangers show currencies at Tehran's old main bazaar, Iran, Nov. 25, 2014.

Currencies in many emerging market nations have been buying less and less for more than a year.

In sometimes turbulent trading, the currencies of Brazil, Russia, Chile, Turkey, Malaysia, Indonesia, and other nations have fallen sharply, in some cases losing 20 percent of their value or even more.

Joshua Brockwell, of Azzad Asset Management, said emerging market currencies have been hurt by the soaring dollar, falling commodity prices, and worries about slowing global economic growth.

Impact of currency changes

Experts say a weaker currency makes it more expensive to buy imported items, from gasoline to medications, which can be a source of inflation.

But a weaker currency can also help boost exports by making them less expensive and therefore more competitive on global markets. Stronger exports can help economic growth.

That is why critics accused China of seeking an unfair price advantage when Beijing allowed the value of the Renminbi, also known as the Yuan, to decline recently. Chinese officials said the change was driven by market forces.

What hurt emerging market currencies?

Several years ago, emerging market currencies began rising in value when record-low interest rates in the United States gave investors disappointing returns. Investors move their money to the place where they get the best combination of return and risk, and fast-growing developing nations looked like a good bet.

But that changed when the U.S. central bank signaled its intention to raise the key interest rate. Economist Joe Brusuelas of McGladrey LLP said U.S. rates will probably go up about two percent over the next three years. That will give people who invest in the United States better returns than other nations that are still holding interest rates at very low levels in a bid to boost economic growth.
Improving U.S. growth means low interest rates are no longer needed.

Brusuelas said the end of record-low U.S. interest rates mean global financial “tectonic plates” are shifting. “You should expect to see capital flow towards economies where it can get better rates of return, and that's exactly what we are seeing.”

Currency values are also affected by risk, which has risen recently as China’s economic growth slowed. Less growth in the world’s second-largest economy means less demand for crude oil and other commodities that are important exports for many emerging markets.

Brusuelas said that sparked "a crisis of confidence among global investors.” When a lot of worried investors sell a particular currency, the decline in demand for that kind of money drives down its price.

Declining outlook

Brockwell said some emerging market currencies have fallen to a level that reflects their current economic fundamentals, while others have dropped even lower.

Brusuelas said many currencies are influenced by the value of the Chinese yuan, which he predicts will fall another three percent, pulling emerging market exchange rates down even further.

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